Demonstrate the impact of an increasing GDP. Is it possible that people could be worse off despite an increasing GDP If so, show this in economic terms - Essay Example

Gross Domestic Product The paper entails a study of the facets of the Gross Domestic Product (GDP) and itsimpact on the respective population’s wellbeing. In addition, the paper will attempt to prove the following hypothesis: H0: Is it possible that the living standards can deteriorate with an increasing GDP? A thorough analysis of the facets and impact of GDP will strive to ascertain that indeed people could be worse off despite and increasing GDP. A visual impression will be necessary to provide the objective judgment of the afore-mentioned hypothesis.

Literature Review Andrew Oswald in “Is GDP growth a Poor Measure of Improving Living Standards” supported an argument that GDP is not the best possible measure of wellbeing. He argues that GDP measures the product output for a particular year, ignoring the most important aspects of wellbeing such as environmental factors (Oswald, 79). Oswald gives a perfect example that supports the hypothesis. He asserts that he would prefer to live in Caicos Islands to Iran regardless of a stable GDP in the latter.

DeLong, an economist, defined GDP as the total value of products divided by the total population. He argued that many citizens do not understand the intrinsic value of the statement rather they understand it from its face value (Cohen, and DeLong, 28). People consume a different mix of products at different periods. A person purchasing luxury goods may contribute to a better GDP, but another individual of a different social class may find it difficult to afford some basic needs. DeLong achieves a valid argument to support the hypothesis that GDP is not necessarily a measure of living standards; hence, the assertion that living standards can deteriorate with an increasing GDP.

Evidence Internal Factors With the numerous advancements in production, consumption, savings, and investments, it is possible to support both Oswald’s and DeLong’s perspective on the fact the living standards may deteriorate despite an increasing GDP. GDP is measured by a combination of consumption (C), investments (I), government spending (G), imports (M), and exports (X); that is; The function above is sufficient to test the hypothesis without including external factors such as technology, education and, environmental factors.

In light of DeLong’s assertion, people consume a different mix of products at different periods. As such, the ‘C’ above depicts the overall consumption of a country. It is prudent to note that a person consuming luxury products is not an indication of the level of consumption for the entire population. Some people will have a higher marginal propensity to save (MPS) as compared to the marginal propensity to consume (MPC). According to the equation, , individuals with a higher MPS will have a lower MPC, ceteris paribus (Martins, 100).

As such, the propensity to save is inversely proportional to the propensity to consume. However, consumption is directly proportional to the GDP. This means that DeLong’s assertion that the consumption of a different mix of products does not necessarily depict improved living standards is valid because GDP fails to consider the marginal utility (MU) derived from consuming an extra unit for every product (Cohen, and DeLong, 78). For example, an individual may have two cars and still able to afford a third one.

The marginal utility derived from the third car is lower to that from the first. As such, consumption beyond the tenth unit indicates diminishing marginal utility as opposed to improved living standards. Therefore, GDP focuses on consumption as a whole failing to consider the factors inherent in consumption. In addition, investments are a significant factor of GDP. Increased investments mean an increase in GDP, as per the equation. However, investments are influenced by the monetary policies offered by the Central Bank.

A low rate of lending translates to increased investments; hence, an increase in GDP. However, the function ignores the viability of the investments. An individual may borrow a loan to invest but struggles to repay the loan. Such individuals may end up selling their assets to settle the loan. In such a case, investments may have increased the GDP, but the living standards may deteriorate the individual fails to meet the requirements for the commercial banks. External Factors The main facet of external factors is technology.

The ‘P’ in GDP stands for ‘product’. In the contemporary world, production relies on technology. This translates to unemployment as most systems are automated for efficiency. While the GDP will increase due to increased production, the living standards will continue to deteriorate with increased unemployment levels. This can be illustrated as; Employment The two graphs represent the impact of technology on both GDP and employment. Technological advancement is directly proportional to GDP because as production increases to due efficiency, the GDP increases.

On the other hand, automation of systems relinquishes the need for human capital. The curve indicates that although some people will be employed to operate the systems, the rate of employment reduces gradually. Increased production results in externalities of growth such as pollution. The economic growth in terms of GDP is not sufficient to cater for the social costs incurred due to pollution and global warming. In addition, economic growth means increased inequality in terms of income distribution in the sense that the rich become richer, and the poor remain poor.

Education is a major component of living standards. An increase in GDP does not translate to an increase in literacy. The poor, who are mostly illiterate, will continue with their lifestyle despite an increasing GDP; hence, the assertion that living standards can deteriorate with an increasing GDP. As aforementioned, automation of systems result in unemployment; hence, an influx of informal settlements, congestion in urban areas, and crime. All these occur amid economic prosperity. Conclusion The argument above supported by literature from Oswald and DeLong proves that it is possible that the living standards can deteriorate with an increasing GDP.

GDP is merely a measure of the goods and services produced within a country. It is not a sufficient measure of the social wellbeing because it does not account for the additional factors that influence living standards. For example, a person may be wealthy, but suffering from obesity. Such an individual may experience deteriorating living standards despite increased consumption. The hypothesis is, therefore, valid and can be further supported by comprehensive monetary and fiscal policies that have an effect on living standards amid economic growth.

Further research may entail the law of one price because GDP focuses on products, despite the fact that similar products have different prices in different locations. It is prudent to analyze the purchasing power parity and the no-arbitrage assumption to evaluate the living standards rather than assuming that the GDP per capita is a measure of social wellbeing (Todaro, and Smith, 40). Work Cited Cohen, Stephen S, and J. Bradford De Long. The End Of Influence. New York: Basic Books, a member of the Perseus Books Group, 2010. Print. Martins, JH.

Household Cash Expenditure By Living Standards Measure Group. Journal of Family Ecology and Consumer Sciences /Tydskrif vir Gesinsekologie en Verbruikerswetenskappe 34.1 (2010): n. pag. Web. Oswald, Andrew J. Happiness And Economic Performance. University of Oxford, Institute of Economics and Statistics, 1997. Print. Todaro, Michael P, and Stephen C Smith. Economic Development. Boston: Pearson Addison Wesley, 2006. Print.